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DC - 'Welcome' Budget reforms likely to prompt change at DC schemes

Trustees, sponsors and their advisers overwhelmingly support the pension liberalisation announced in the Budget by the Chancellor, George Osborne, and are likely to change their schemes as a result, according to a survey of attendees at our Defined Contribution Conference earlier this year.

01/09/2014

Trustees, sponsors and their advisers overwhelmingly support the pension liberalisation announced in the Budget by the Chancellor, George Osborne, and are likely to change their schemes as a result, according to a survey of attendees at our Defined Contribution Conference earlier this year

More than four-fifths of respondents believe the increased flexibility will be a good thing for defined contribution (DC) pensions (Figure 1). Many delegates saw the changes as lifting burdensome restrictions which would make pensions more attractive. One said: ‘Annuitisation has always smacked of the “nanny state”, and the previous limits on minimum guaranteed income…were unreasonably harsh.’ Other typical comments were that ‘things needed a radical overhaul to increase member confidence and engagement’ and ‘the working population will soon come to realise that pension contributions are no longer “dead money” but readily realisable savings for their future which they can use for their benefit.’

However, among the few dissenters, there were concerns that the changes may encourage people to make the wrong choices at retirement. One or two highlighted the mixed messages sent by the moves. According to one attendee, they ‘conflict with auto enrolment [and] take the focus away from the true problem: the guaranteed funding of old age.’

Nonetheless, approaching 90% of our respondents believed that DC schemes would now have to provide multiple default strategies to cope with the new post-retirement landscape (Figure 2).

There was a general view that schemes would need to accommodate the new freedom to choose between annuities, cash and drawdown. However, one comment was that this would ‘add to the complexity from a member’s perspective, which is not ideal. Member communication is going to be even more important’. Some pointed to the need for more financial education. But of the few who disagreed, many pointed out there could be only one default; having more would be difficult to manage.

Not surprisingly, there was also a big majority of respondents who thought that they would need to look again at the default investment strategy of their schemes in the light of both the Budget and the announcement that the government will cap charges at 0.75%. Several attendees thought they would now need to review existing default approaches which assumed that members would buy an annuity. On the whole, the charge cap seemed to be less of an issue with respondents. For instance, our sample was evenly split on whether the cap would lead to fewer ‘outcome-based’ investment solutions being used in DC schemes.

There was also uncertainty over the future of annuities. Only a slim majority believed that they would continue to have a role in retirement planning at the point work stops in the wake of the Budget changes (Figure 3). Even so, quite a few attendees believed the certainty of a regular income would continue to appeal to retirees, albeit perhaps once they were a little older. One comment was that: ‘When it is optional, an annuity is likely to be seen as more valuable.’

About us

Schroders is a global asset management company with £271.5 billion under management and an international network spanning 37 offices in 27 countries. We have significant experience of managing DC assets and of helping scheme managers, trustees and sponsors to operate pension schemes efficiently. We manage assets for DC pension schemes in the UK and also have relationships with institutional investment platforms. With more than £37 billion in assets, managed on behalf of both defined benefit and defined contribution pension schemes in both the corporate and public sector, UK pension funds form a significant proportion of our global client base.

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